Corporations:
A Contemporary Approach
Chapter 6
Slide 1
Organizational Choices
of 28
Mirror Image of Joan Miro, Ciphers and Constellations: in Love with a Woman (1941)
Module III – Corporate Form
Chapter 6
Organizational Choices
Bar
exam
Corporate
practice
Law
profession
• Basic choices: partnerships, corporation, LLC
• Essential characteristics:
– Formation
– Liability
– Owner voting
– Management
– Financial rights (tax)
– Liquidity
– Change/combinations
• Planning considerations
Citizen of
world
Corporations:
A Contemporary Approach
– Economics of choice
– Tax consequences
Chapter 6
Organizational Choices
Slide 2
of 28
Two entrepreneurs …
Brandon
Anita
Organize them …
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 3
of 28
Organizational issues
1.
Formation of business
•
•
2.
Liability for business obligations
•
•
3.
4.
Voting rights?
Majority or unanimous?
Management
•
•
5.
Discretion?
Ability to bind business?
Financial rights
•
•
6.
Profits / losses shared?
Right to payments?
Liquidity (transferability)
•
•
7.
Effect of withdrawal?
Permission of others?
Changes/combinations
•
•
8.
Process of approval
Protection of stakeholders
Tax attributes
•
•
Chapter 6
Organizational Choices
Non-recourse structure?
Respondeat superior?
Owner control
•
•
Corporations:
A Contemporary Approach
Formalities?
Filing with state?
Flow-through vs entity tax
Protection of stakeholders
Slide 4
of 28
Organizational choices
Partnerships NC
LLCs NC
General p-ship
GP = personal liab
Corporations NC
Shareholders
Members
LLP
GP = ltd liab (tort)
Limited p-ship
General P / Ltd P
LLLP
General P / Ltd P
Corporations:
A Contemporary Approach
Board
LLC
Corporation
Member-managed
Manager-managed
Public (PHC) vs. Close (CHC)
C Corp vs S Corp
“Limited liability corporation”
Chapter 6
Organizational Choices
Slide 5
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Business entity nomenclature
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 6
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Corporations:
A Contemporary Approach
Chapter 6
Slide 7
Organizational Choices
of 28
Mirror Image of Joan Miro, Ciphers and Constellations: in Love with a Woman (1941)
NC General Statutes
(Business Organizations)
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 8
of 28
NC General Statutes
(Business Organizations)
•
•
•
•
•
•
•
•
•
•
•
•
Chapter 53 - Banks.
Chapter 53A - Business Development
Corporations
Chapter 53B - Financial Privacy Act.
Chapter 54 - Cooperative Organizations.
Chapter 54A - Capital Stock Savings and Loan
Associations.
Chapter 54B - Savings and Loan Associations.
Chapter 54C - Savings Banks
Chapter 55 - North Carolina Business
Corporation Act.
Chapter 55A - North Carolina Nonprofit
Corporation Act.
Chapter 55B - Professional Corporation Act.
Chapter 55C - Foreign Trade Zones.
Chapter 55D - Filings, Names, and
Registered Agents for Corporations,
Nonprofit Corporations, and Partnerships.
Corporations:
A Contemporary Approach
•
•
•
•
•
•
•
•
•
Chapter 56 - Electric, Telegraph and Power
Companies.
Chapter 57 - Hospital, Medical and Dental
Service Corporations.
Chapter 57A - Health Maintenance
Organization Act.
Chapter 57B - Health Maintenance
Organization Act.
Chapter 57C - North Carolina Limited
Liability Company Act.
Chapter 58 - Insurance.
Chapter 58A - North Carolina Health
Insurance Trust Commission.
Chapter 59 – Partnership [including LLP
and Limited Partnership].
Chapter 59B - Uniform Unincorporated
Nonprofit Association Act.
Chapter 6
Organizational Choices
Slide 9
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Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 10
of 28
Organizational choices
Formation
Liability
Voting
Mgmt
Financial
Liquidity
General partnership
Association*
filing LLP*
(agreement)
Joint / sev *
LLP-limited
(supervise)
equal
equal
/ agent
share
profits
(equal)
Limited partnership
filing*
(agreement)
LP-ltd
GP-jt/sev
(ltd if LLLP)
agreement
LP-ltd
GP-manage
share
distributions
($ contrib)
LP-Yes
GP-No
(withdraw)
filing *
(bylaws)
limited
(PCV*)
directors*
fund'tal tx*
board
(PHC*)
dividends
(per share)
filing *
(agreement)
limited
(PCV*)
directors
fund'tal tx
board
Dividends +
salaries
* mandatory
Change
Tax
All agree
Pass
through
All agree
Pass
through
Yes
(PHC*)
Board + Sh
majority
(PHC*)
income *
Legally yes
(agreement)
Board + Sh
majority
Pass
through
Partnership
No
(withdraw)
Corporation
C Corporation
S Corporation (CHC)
Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available."
Member-managed
filing *
(agreement)
limited
(PCV*)
equal
equal /
agent
equal
distributions
No
(withdraw
mgmt)
All Ms
agree
Pass
through
Manager-managed
filing *
(agreement)
limited
(PCV*)
equal
manager
equal
distributions
No
(withdraw
voting)
All Ms
agree
Pass
through
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 11
of 28
Organizational choices
(Formation)
* mandatory
Formation
Partnership
LLC
Corporation
Partnership
General partnership
Limited partnership
Shareholders
Association*
filing LLP*
(agreement)
filing*
(agreement)
Members
Partners
LLC
Corporation
C Corporation
S Corporation (CHC)
Board
Corporation
filing *
(bylaws)
filing *
(agreement)
Limited liability company
Member-managed
filing *
(agreement)
Manager-managed
filing *
(agreement)
Corporations:
A Contemporary Approach
Example 6.1
Q: A operates a beauty shop and hires B as a receptionist. When B
asks for a raise, they agree in writing that B will share in profits.
Their agreement states they are a “partnership.”
A: Under the UPA, they are not co-owners and thus not partners. A
contributed everything to the shop and controls the business. B’s
sharing in profits is only a wage increase. Their relationship is
that of employer-employee, not partners.
Chapter 6
Organizational Choices
Slide 12
of 28
Organizational choices
(Liability)
* mandatory
Liability
Partnership
LLC
Corporation
Partnership
General partnership
Limited partnership
Shareholders
Joint / sev *
LLP-limited
(supervise)
LP-ltd
GP-jt/sev
(unless LLLP)
Members
Partners
Board
LLC
Corporation
C Corporation
limited
(PCV*)
S Corporation (CHC)
limited
(PCV*)
Limited liability company
Member-managed
limited
(PCV*)
Manager-managed
limited
(PCV*)
Corporations:
A Contemporary Approach
Corporation
Example 6.2
Q: A provides capital and controls day-to-day operations in B’s custom
auto-making business. B agrees to build a car for X, but fails to
perform and disappears. X seeks to hold A liable on the contract
on the theory A was B’s partner, not his “banker.”
A: Under the UPA, even if A and B did not intend to create a
partnership, they become partners as a matter of law. By sharing
profits and control, A becomes liable to X on the contract.
Chapter 6
Organizational Choices
Slide 13
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Organizational choices
(Liability)
* mandatory
Liability
Partnership
LLC
Corporation
Partnership
General partnership
Limited partnership
Shareholders
Joint / sev *
LLP-limited
(supervise)
LP-ltd
GP-jt/sev
(unless LLLP)
Members
Partners
Board
LLC
Corporation
C Corporation
limited
(PCV*)
S Corporation (CHC)
limited
(PCV*)
Limited liability company
Member-managed
limited
(PCV*)
Manager-managed
limited
(PCV*)
Corporations:
A Contemporary Approach
Corporation
Example 6.3
Q: A and B agree to form a law partnership, which they constitute as an
LLP by filing the appropriate papers. B litigates a products liability
case; one of the firm’s associates (an employee) misses a filing
deadline, and the case is dismissed. The client brings a
malpractice action against the LLP, and against A and B.
A: Generally, only the LLP would be liable, not A or B. But this is a
professional LLP, and in many states, B might be liable as
supervisor.
Chapter 6
Organizational Choices
Slide 14
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Organizational choices
(Owner Voting)
* mandatory
Voting
Partnership
LLC
Corporation
Partnership
Shareholders
equal
General partnership
Members
Limited partnership
agreement
Partners
Board
LLC
Corporation
C Corporation
directors*
fund'tal tx*
S Corporation (CHC)
directors
fund'tal tx
Limited liability company
Member-managed
equal
Manager-managed
equal
Corporations:
A Contemporary Approach
Corporation
Example 6.6
Q: A and B form a limited partnership to hold real estate (a shopping
center). A is the limited partner and provides the capital; B is the
general partner and manages the business. But their agreement
specifies that A must sign all checks drafted by B.
A: Under older ULPA, A may have crossed the line and become a
general partner, exposing her to general partner liability. Newer
ULPA S 303 (2001), says “even if … participates” not liable for LP
debts.
Chapter 6
Organizational Choices
Slide 15
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Organizational choices
(Management)
* mandatory
Mgmt
Partnership
LLC
Corporation
Partnership
Shareholders
equal
/ agent
General partnership
Members
Limited partnership
LP-ltd
GP-manage
Partners
Board
LLC
Corporation
C Corporation
board
(PHC*)
S Corporation (CHC)
board
Limited liability company
Member-managed
equal /
agent
Manager-managed
manager
Corporations:
A Contemporary Approach
Corporation
Example 6.5
Q: A and B form a GP that rents properties. Their agreement does not
specify who has authority if there is a disagreement. A wants to
increase rents, while B does not. A sues B for lost profits that the
GP could have realized if rents had been increased.
A: Under the UPA, the decision of the majority governs. If two partners
are equally divided, and without an agreement otherwise, the
remedy is a dissolution. A’s suit fails.
Chapter 6
Organizational Choices
Slide 16
of 28
Organizational choices
Formation
Liability
Voting
Mgmt
Financial
Liquidity
General partnership
Association*
filing LLP*
(agreement)
Joint / sev *
LLP-limited
(supervise)
equal
equal
/ agent
share
profits
(equal)
Limited partnership
filing*
(agreement)
LP-ltd
GP-jt/sev
(ltd if LLLP)
agreement
LP-ltd
GP-manage
share
distributions
($ contrib)
LP-Yes
GP-No
(withdraw)
filing *
(bylaws)
limited
(PCV*)
directors*
fund'tal tx*
board
(PHC*)
dividends
(per share)
filing *
(agreement)
limited
(PCV*)
directors
fund'tal tx
board
Dividends +
salaries
* mandatory
Change
Tax
All agree
Pass
through
All agree
Pass
through
Yes
(PHC*)
Board + Sh
majority
(PHC*)
income *
(zero out)
Legally yes
(agreement)
Board + Sh
majority
Pass
through
Partnership
No
(withdraw)
Corporation
C Corporation
S Corporation (CHC)
Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available."
Member-managed
filing *
(agreement)
limited
(PCV*)
equal
equal /
agent
distributions
(equal)
No
(withdraw
mgmt)
All Ms
agree
Pass
through
Manager-managed
filing *
(agreement)
limited
(PCV*)
equal
manager
distributions
(equal)
No
(withdraw
voting)
All Ms
agree
Pass
through
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 17
of 28
Planning
considerations
Economics of the firm
•
•
•
Firms: capital + mgmt
Equity > debt
P-ship lacks stability /
corporation too stable
Opportunism
•
•
GP: dissolution  majority
buys out low, skilled P
Corporation: illiquidity 
majority intransigence
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Richard Posner
Slide 18
of 28
Organizational choices
Formation
Liability
Voting
Mgmt
Financial
Liquidity
General partnership
Association*
filing LLP*
(agreement)
Joint / sev *
LLP-limited
(supervise)
equal
equal
/ agent
share
profits
(equal)
Limited partnership
filing*
(agreement)
LP-ltd
GP-jt/sev
(ltd if LLLP)
agreement
LP-ltd
GP-manage
share
distributions
($ contrib)
LP-Yes
GP-No
(withdraw)
filing *
(bylaws)
limited
(PCV*)
directors*
fund'tal tx*
board
(PHC*)
dividends
(per share)
filing *
(agreement)
limited
(PCV*)
directors
fund'tal tx
board
Dividends +
salaries
* mandatory
Change
Tax
All agree
Pass
through
All agree
Pass
through
Yes
(PHC*)
Board + Sh
majority
(PHC*)
income *
(zero out)
Legally yes
(agreement)
Board + Sh
majority
Pass
through
Partnership
No
(withdraw)
Corporation
C Corporation
S Corporation (CHC)
Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available."
Member-managed
filing *
(agreement)
limited
(PCV*)
equal
equal /
agent
distributions
(equal)
No
(withdraw
mgmt)
All Ms
agree
Pass
through
Manager-managed
filing *
(agreement)
limited
(PCV*)
equal
manager
distributions
(equal)
No
(withdraw
voting)
All Ms
agree
Pass
through
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 19
of 28
Organizational choices
(Financial Rights)
* mandatory
Financial
Partnership
LLC
Corporation
Partnership
Limited partnership
Shareholders
share
profits
(equal)
General partnership
share
distributions
($ contrib)
Members
Partners
Board
LLC
Corporation
C Corporation
dividends
(per share)
S Corporation (CHC)
dividends +
salaries
Limited liability company
Member-managed
distributions
(equal)
Manager-managed
distributions
(Ms equal)
Corporations:
A Contemporary Approach
Corporation
Example 6.7
Q: A and B form a logging GP -- A contributes capital and B the
equipment. They do not specify in their agreement how losses
will be shared. The business does not generate enough profits to
cover A’s capital contribution, and A asks B to share in the net
losses.
A: The UPA controls, in the absence of an agreement. B must
contribute toward the loss (including the capital loss) according to
his share in the profits. [Some courts give B credit for his labor.]
Chapter 6
Organizational Choices
Slide 20
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Organizational choices
(Liquidity)
* mandatory
Liquidity
Partnership
LLC
Corporation
Partnership
General partnership
Shareholders
No
(withdraw)
Members
Limited partnership
LP-Yes
GP-No
(withdraw)
Partners
LLC
Corporation
Corporation
Yes
(PHC*)
C Corporation
S Corporation (CHC)
Board
Legally yes
(agreement)
Limited liability company
Member-managed
No
(withdraw
mgmt)
Manager-managed
No
(withdraw
voting)
Corporations:
A Contemporary Approach
Example 6.8
Q: A and B are partners in a family GP. They have no written agreement
about dissolution. A wants to end the partnership, sell (liquidate)
the business assets, and then split the cash proceeds. B wants to
divide the assets in-kind between them, but not sell.
A: Under the UPA, a partner in an at-will GP can withdraw (causing
dissolution) and share in a forced liquidation of partnership
assets, provided creditors are first fully paid.
Chapter 6
Organizational Choices
Slide 21
of 28
Organizational choices
(Change/Combination)
* mandatory
Change
Partnership
LLC
Corporation
Partnership
Shareholders
All agree
General partnership
Members
Limited partnership
All agree
Partners
Board
LLC
Corporation
C Corporation
Board + Sh
majority
(PHC*)
S Corporation (CHC)
Board + Sh
majority
Limited liability company
Member-managed
All Ms
agree
Manager-managed
All Ms
agree
Corporations:
A Contemporary Approach
Corporation
Example 6.10
Q: A, B and C are equal partners in GP that owns and rents two
identical beachfront condos. A and C have a falling out, but B
wants to keep his partnership with C.
A: Two new partnerships can be created: A and B create AB Partners; B
and C create BC Partners. The GP transfers one condo to AB
Partners and the other to BC Partners. Following the transfer, GP
dissolves.
Chapter 6
Organizational Choices
Slide 22
of 28
Organizational choices
(Tax)
* mandatory
Tax
Partnership
LLC
Corporation
Partnership
Shareholders
Pass
through
General partnership
Pass
through
Limited partnership
Members
Partners
LLC
Corporation
C Corporation
Board
Corporation
income *
(zero out)
S Corporation (CHC)
Pass
through
Limited liability company
Member-managed
Pass
through
Manager-managed
Pass
through
Corporations:
A Contemporary Approach
Example 6.11 (A and B plan to form a business)
Scenario #1: They will pay themselves salaries totaling $70,000 and
expect net income of $80,000.
A: If the business is a corporation, they will pay total federal income
taxes of $24,700, but only $14,700 if they organize as a partnership.
Scenario #2: They take the same salaries, but the business has a net
loss of $20,000.
A: Federal income tax (total): corporation $2,800, partnership $800.
Chapter 6
Organizational Choices
Slide 23
of 28
Business taxation
(couple hypotheticals)
#1 Make money
(at start)
#2 Lose money
(at start)
Assume business owners
have personal income of
$70,000 and anticipate
business income of $80,000.
Assume business owners
have personal income of
$70,000 and anticipate
business losses of $20,000.
How should they organize the
business?
How should they organize the
business?
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 24
of 28
Make money
(double corporate taxation)
Pass-through
Corporate
Personal income
$70
$70
Business income
$80
$80
Business tax
$0
$15.4
Dividends / share
$80
$64.6
Total income
$150
$134.4
Personal tax
$13.5
$11.2
What is total tax?
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 25
of 28
Lose money
(flow through of losses)
Pass-through
Corporate
$70
$70
Business loss
($20)
($20)
Business tax
$0
$0
($20)
$0
Total income
$50
$70
Personal tax
$0.2
$2.2
Personal income
Dividends / share
What is total tax?
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 26
of 28
Zero-out income
Corporate
Corporate
(no deductions)
(deductions)
Personal income
$75
$75
Business income
$60
$60
Business expense
($60)
Business tax
$9
$0
Dividends / salary
$51
$60
Total income
$126
$135
Personal tax
$22
$25
What is total tax?
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 27
of 28
Organizational choices
Formation
Liability
Voting
Mgmt
Financial
Liquidity
General partnership
Association*
filing LLP*
(agreement)
Joint / sev *
LLP-limited
(supervise)
equal
equal
/ agent
share
profits
(equal)
Limited partnership
filing*
(agreement)
LP-ltd
GP-jt/sev
(ltd if LLLP)
agreement
LP-ltd
GP-manage
share
distributions
($ contrib)
LP-Yes
GP-No
(withdraw)
filing *
(bylaws)
limited
(PCV*)
directors*
fund'tal tx*
board
(PHC*)
dividends
(per share)
filing *
(agreement)
limited
(PCV*)
directors
fund'tal tx
board
Dividends +
salaries
* mandatory
Change
Tax
All agree
Pass
through
All agree
Pass
through
Yes
(PHC*)
Board + Sh
majority
(PHC*)
income *
(zero out)
Legally yes
(agreement)
Board + Sh
majority
Pass
through
Partnership
No
(withdraw)
Corporation
C Corporation
S Corporation (CHC)
Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available."
Member-managed
filing *
(agreement)
limited
(PCV*)
equal
equal /
agent
distributions
(equal)
No
(withdraw
mgmt)
All Ms
agree
Pass
through
Manager-managed
filing *
(agreement)
limited
(PCV*)
equal
manager
distributions
(equal)
No
(withdraw
voting)
All Ms
agree
Pass
through
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 28
of 28
The end
Corporations:
A Contemporary Approach
Chapter 6
Organizational Choices
Slide 29
of 28
NC LLC Act
•
•
•
•
ULLCA (2006)
Must designate type of LLC in articles [§
57C-3-20]
– manager-managed or membermanaged
– management structure in operating
agreement [§ 57C-3-24 ]
Member-managed LLC
– Members are like partners
– Authority: any member can bind
LLC
– Management: all members vote on
ordinary business (majority) and
extraordinary business (unanimous)
Manager-managed LLC
– Managers are like partners (see
above)
– Non-manager members only vote on
extraordinary matters
Third parties must check articles of
association, since name doesn’t indicate
status
Corporations:
A Contemporary Approach
•
•
•
•
Designate type of LLC in operating agreement
[§§ 102, 201(b)]
– member-managed, unless specified
otherwise
– Designation not in (filed) certificate of
organization
Member-managed LLC (default)
– Members have rights of partners
– designated members can be relieved of
management responsibilities and attendant
fiduciary duties [§ 110(e]]
– Can file statement of authority with Secy of
State [§ 302]
Manager-managed LLC
– Only managers have authority and
management powers
– Managers have equal rights, act by majority
vote – though unanimity of all members for
fundamental changes [§ 407(c)]
Operating agreement can specify different
management structure
Chapter 6
Organizational Choices
Slide 30
of 28